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On November 25 2012 04:22 oneofthem wrote: that's a pretty good point. it all results in lowered labor share of the economy and thus the consumption households. finance gets larger and larger and you have these bubbles.
here's a presentation of an IMF study using very mainstream methodology on how inequality, specifically the degenerating household income basis for consumption, leads to expansion of finance (selling of credit) and that in turn leads to trouble (if not exploitation)
Yes, exactly. In the end, the core problem is the concentration of the capital in a little number of hands.
On November 25 2012 04:22 oneofthem wrote: that's a pretty good point. it all results in lowered labor share of the economy and thus the consumption households. finance gets larger and larger and you have these bubbles.
here's a presentation of an IMF study using very mainstream methodology on how inequality, specifically the degenerating household income basis for consumption, leads to expansion of finance (selling of credit) and that in turn leads to trouble (if not exploitation)
I don't dismiss that inequality plays a role but I find it difficult to square the idea that US consumers don't have enough purchasing power with the huge and persistent trade deficits the country runs. US consumers don't consume enough, yet they consume far more than they produce. I could be off here, but its hard for me to mesh those two ideas together.
I think WhiteDog had a better original point; that other countries (Middle East and Asia in particular) geared their economies toward saving, investing in domestic supply and exporting like crazy - particularly to the US (the biggest consumer). That priced a lot of developed world workers out of the market for labor intensive products while not offering a counter balancing domestic market for the developed world to export to.
the trade deficit occurred during a phase of credit expansion though, so the consumers were fueling the deficit with debt. the strength of the dollar also played a large part in it.
i also disagree that other economies "gear" themselves toward high savings. it is as whitedog said, their domestic consumer and investment markets are pretty bad because their own people are poor and their export industries capture too little value for the domestic laborer-consumers. so this forces the money to go to the u.s.
so instead of building say great walls or pyramids the pharaohs of the east buy u.s. assets and debt. (hence strength of dollar)
if the domestic markets were stronger, i.e. less inequality, in say china and india, then the trade deficit would not be nearly as large as it is. i.e. if china developed more like japan or taiwan, with less oligarchy and better behaving rich and powerful, it'd be better for everyone.
On November 25 2012 04:56 oneofthem wrote: the trade deficit occurred during a phase of credit expansion though, so the consumers were fueling the deficit with debt. the strength of the dollar also played a large part in it.
i also disagree that other economies "gear" themselves toward high savings. it is as whitedog said, their domestic consumer and investment markets are pretty bad because their own people are poor and their export industries capture too little value for the domestic laborer-consumers. so this forces the money to go to the u.s.
so instead of building say great walls or pyramids the pharaohs of the east buy u.s. assets and debt. (hence strength of dollar)
if the domestic markets were stronger, i.e. less inequality, in say china and india, then the trade deficit would not be nearly as large as it is.
So US consumers over borrow because of inequality and foreign consumers over save because of inequality? It doesn't make sense to me that the same thing is producing the exact opposite results. There has to be more to it than that.
It makes more sense that Asian countries have suppressed their domestic economies and strengthened their export economies by various means - not least of all being the explicit policy of currency devaluation (the flip side being that the US currency becomes over valued). A cheaper currency would encourage a trade surplus with the US through higher exports and lower imports.
it's not the foreign consumers who are doing the saving, it's the rich in those countries. inequality means higher % of income is put into the rich who in turn have a higher 'savings' rate in foreign assets.
the poor don't over save. they just are poor. especially when it takes a standard chinese worker 80 yaers to afford a house.
reason why inequality leads to different results on savings rate in u.s. vs asia is because of the different role of the two household sectors in the global circuit. and also because u.s. consumers have more of a credit line, more sellers of credit.
the u.s. consumer drives consumption. if their real income is falling, they borrow, often against rising home value fueled by a bubble. they are credit buyers. the asian consumer is more like a worker. their income does rise, but the overall % of income going into consumption purchases fall(relative to a closed, domestic market circa 1960 in the u.s.), because the rich in those countries(or foreign capital) capture more of the wealth. this means more of the wealth overall goes into assets, and also debts for the u.s. consumer.
On November 25 2012 05:45 oneofthem wrote: it's not the foreign consumers who are doing the saving, it's the rich in those countries. inequality means higher % of income is put into the rich who in turn have a higher 'savings' rate in foreign assets.
the poor don't over save. they just are poor. especially when it takes a standard chinese worker 80 yaers to afford a house.
No, most households have a very high savings rate in China. That's why people are encouraging China to have a stronger social safety net as a means to reduce the savings rate. If it was just the rich saving, that wouldn't make sense.
The motivation for this research is that the average saving rate for urban households in China has increased from 15 percent in the early 1990s to over 30 percent in recent years (Figure 1).1 Households are the main contributors to China’s large national savings (Figure 2). This pattern of a rising household saving rate at a time of high income growth seems inconsistent with a certainty-equivalent life-cycle hypothesis model, which would imply that future high income growth should cause households to postpone their savings. In addition to the increase in saving rates across the board, there has been a particularly pronounced increase in saving rates among households with younger and older household heads (Figure 3; Chamon and Prasad, 2010). Our main contribution to the literature on Chinese savings is to show that the rise in income uncertainty and the 1997 pension reform can together explain more than half of the observed rise in household saving rates as well as the dramatic shift in the age-saving profile.
reason why inequality leads to different results on savings rate in u.s. vs asia is because of the different role of the two household sectors in the global circuit. and also because u.s. consumers have more of a credit line, more sellers of credit.
That "global circuit" you mention is there by design. Developing countries run trade surpluses on purpose as their development strategy. Which requires a high savings rate to pull off:
The development of manufacturing industries and the necessary supporting infrastructure required a large volume of investment – averaging over 30% of GDP in the high growth stage (see Table 5). This was generally the principal driver of growth during the earlier stages when industrialization was unusually fast paced. Much of the investment was financed from domestic sources, however, each country benefitted from the inflow of foreign capital and technology via ODA and FDI.
the poor in china do save, but that saving is put into overpriced housing, which is a form of asset investment for the rich. of course they'll have to save to afford a house (and marriage for their children). as such they do not contribute to the purchasing of foreign assets, which is the rich's doing.
but yea, because most of the poor's 'savings' is just for simple survival, it fits into the logic of them not doing so well. imagine if you can only buy food in units of 50 years of your income.
we were talking about capital flow from developing countries into developed world. so yea, the active portion here is also inequality driven.
developmental strategy does not explain the difference in domestic market development seen in japan, taiwan etc vs china etc.
On November 25 2012 06:26 oneofthem wrote: the poor in china do save, but that saving is put into overpriced housing, which is a form of asset investment for the rich. of course they'll have to save to afford a house (and marriage for their children). as such they do not contribute to the purchasing of foreign assets, which is the rich's doing.
but yea, because most of the poor's 'savings' is just for simple survival, it fits into the logic of them not doing so well. imagine if you can only buy food in units of 50 years of your income.
we were talking about capital flow from developing countries into developed world. so yea, the active portion here is also inequality driven.
developmental strategy does not explain the difference in domestic market development seen in japan, taiwan etc vs china etc.
When the poor in China save to buy a house they first put the cash in the banks. The banks then prioritized their lending to export companies (because that's what Beijing wanted). Running a trade surplus with the US then meant that China had an over abundance of dollars (useless domestically) and chose to buy US assets (Treasuries) rather than use the dollars to import US goods and services. So while the poor in China aren't directly buying Treasuries, their savings are contributing to the system that does so.
I'm not sure what differences between China vs Japan and Taiwan you are referring to. All three used an export lead growth strategy and still do.
i'm saying the proportion of income that can be used on spending on import goods is lower for the poor in those countries than it is for the rich. beijing's purchase of the dollar is indeed a conscious decision to support their exports, but it is also not the only factor. even if u.s. goods are cheaper by a factor of 3, there still won't be much importing. your objection was that the different effect of inequality on u.s. vs asian consumers, and i said it's because chinese consumers are too poor to bother with debt financed consumption while u.s. consumers are rich enough (or at least their credit reports once said they could).
according to orthodox trade theory, eventually china will be rich enough to buy u.s. goods too. but that has not happened for the vast majority of the population. (although the rich in china face very high import tariff, on 'luxury' products which includes ordinary u.s. capital intensive products) this effect is stronger in less unequal countries with a stronger middle class, such as taiwan/japan.
On November 25 2012 06:53 oneofthem wrote: i'm saying the proportion of income that can be used on spending on import goods is lower for the poor in those countries than it is for the rich. beijing's purchase of the dollar is indeed a conscious decision to support their exports, but it is also not the only factor. even if u.s. goods are cheaper by a factor of 3, there still won't be much importing. your objection was that the different effect of inequality on u.s. vs asian consumers, and i said it's because chinese consumers are too poor to bother with debt financed consumption while u.s. consumers are rich enough (or at least their credit reports once said they could).
according to orthodox trade theory, eventually china will be rich enough to buy u.s. goods too. but that has not happened for the vast majority of the population. (although the rich in china face very high import tariff, on 'luxury' products which includes ordinary u.s. capital intensive products) this effect is stronger in less unequal countries with a stronger middle class, such as taiwan/japan.
Certainly if their purchasing power was greater they could buy more stuff, but that's not the point. The point is that if they saved less they could buy more and if China encouraged domestic consumption over exports they would buy a greater proportion of goods from abroad.
US products are extremely popular in China. We'd sell far more if China encouraged banks to lend more to consumers and less to exporters. We'd also sell more if China encouraged a fair playing field for US goods - including IP protection.
Comparing to Japan, a country more than wealth enough to buy US goods, we still have a huge trade deficit with Japan because the country still believes in export lead growth and frequently devalues its currency to achieve that policy. Similarly Germany has a policy to push exports as a means of growth, is rich, and the US has a large trade deficit with that country. In other words, the export policies are likely more important than the income levels or distributions.
On November 25 2012 06:53 oneofthem wrote: i'm saying the proportion of income that can be used on spending on import goods is lower for the poor in those countries than it is for the rich. beijing's purchase of the dollar is indeed a conscious decision to support their exports, but it is also not the only factor. even if u.s. goods are cheaper by a factor of 3, there still won't be much importing. your objection was that the different effect of inequality on u.s. vs asian consumers, and i said it's because chinese consumers are too poor to bother with debt financed consumption while u.s. consumers are rich enough (or at least their credit reports once said they could).
according to orthodox trade theory, eventually china will be rich enough to buy u.s. goods too. but that has not happened for the vast majority of the population. (although the rich in china face very high import tariff, on 'luxury' products which includes ordinary u.s. capital intensive products) this effect is stronger in less unequal countries with a stronger middle class, such as taiwan/japan.
Certainly if their purchasing power was greater they could buy more stuff, but that's not the point. The point is that if they saved less they could buy more and if China encouraged domestic consumption over exports they would buy a greater proportion of goods from abroad.
isn't the point that they're trying to save up for 80 yrs to buy dat house?
well, the savings rate in china is such because of very distorting land (and population registration) policies and intense wealth disparity, reflected in housing prices. it's not independent of inequality, but a large product of it.
the trade deficit with japan and germany are also of a different nature, as you mentioned before, because it's not due to labor price differential. so that kind of trading relationship isn't that bad for u.s. low level laborers.
anyway the overall point was to explain how inequality created by labor market arbitrage is destabilizing.
edit:
We'd sell far more if China encouraged banks to lend more to consumers and less to exporters
well my point was that the chinese consumer won't take out a loan to buy an iphone if they still need to save their money to afford a house, and other necessities. they also have no line of credit as good as the u.s. consumer so the reaction that seems counterintuitive, that of the u.s. consumer's debt fueled spending in response to lowering real income, does not happen in china.
Why are people getting hung up on entertaining loans/bonds/stocks and not investments as a primary force for consumption? I know that loans are important for how investments are distributed or if they are made, but in essence the investment should be the focus. By increasing the opportunities for obtaining a loan at favourable terms you are essentially encouraging more loans, but at the same time, you are moving money away from workers and towards economic entrepreneurship, lawyers, speculants and moneytanks in general which is not lower middle class in any way shape or form. It is only trickling down from those people to the workers as far as the investements are sustainable and increasing loans is a crude and short-term way of trying to force more dynamics into the economy. Since investors often want a return on their loans and expansion of available loans happens at an increase in interests, it is just peeing your pants to keep warm. Now, having government guarantee a low interest loan and making it available to force the average interest on investment down is probably a good thing (To some extend it is indirect Keynesian deficit spending). However, liberalisation of lending is the killer and what I am ranting against. Keep the interest rates on loans down by keeping money protection (savings etc.) and investment separate. Also put limits on the concentrations of money in single currencies and we are generally better off than looking at inventing fourth and fifth derivate level papers on debt and valuables. To me it sounds like common sense, but the lemming effect of liberalisation to avoid being labeled as "unfriendly to business" is a strong pull on politicians.
To get out of the situation we have to lower the private debt and take the hit on economy it will bring. I expect the unsustainable austerity measures to continue in europe if Merkel wins the election in Germany. The other way is government soaking up private debt by increasing national sovereign debt in the short term and only in the longer term, the governments can pay off the debt, when national spending is under control. In europe that is gonna take decades unless the economic pact gets pushed a few years into the future to allow for debt soaking. Also, the economic inequality in the EURO has to be decreased significantly. For USA it is all about soaking up more of the private debt into sovereign debt and balancing the structural budget in the short term. It sounds easier for USA, but in reality it will be a highly problematic affair because of federal vs state role in taking the hits. The fiscal cliff is only one small step in that direction.
^because the classical model assumes investment spending is always good. not differentiating between different kinds of investments means you have this idea that investment = more productivity = more growth etc.
On November 25 2012 07:55 sam!zdat wrote: it's that gdp tumor yo, gotta keep it expandin'
Actually that probably hit the problem spot on, but then the question becomes: Are there any better way to discribe a national economy? GDP-growth is probably a good measure for many things and especially at a very segregated market with very limited interaction, but aren't there better overall measures for economic progress today?
On November 25 2012 06:53 oneofthem wrote: i'm saying the proportion of income that can be used on spending on import goods is lower for the poor in those countries than it is for the rich. beijing's purchase of the dollar is indeed a conscious decision to support their exports, but it is also not the only factor. even if u.s. goods are cheaper by a factor of 3, there still won't be much importing. your objection was that the different effect of inequality on u.s. vs asian consumers, and i said it's because chinese consumers are too poor to bother with debt financed consumption while u.s. consumers are rich enough (or at least their credit reports once said they could).
according to orthodox trade theory, eventually china will be rich enough to buy u.s. goods too. but that has not happened for the vast majority of the population. (although the rich in china face very high import tariff, on 'luxury' products which includes ordinary u.s. capital intensive products) this effect is stronger in less unequal countries with a stronger middle class, such as taiwan/japan.
Certainly if their purchasing power was greater they could buy more stuff, but that's not the point. The point is that if they saved less they could buy more and if China encouraged domestic consumption over exports they would buy a greater proportion of goods from abroad.
isn't the point that they're trying to save up for 80 yrs to buy dat house?
On November 25 2012 06:53 oneofthem wrote: i'm saying the proportion of income that can be used on spending on import goods is lower for the poor in those countries than it is for the rich. beijing's purchase of the dollar is indeed a conscious decision to support their exports, but it is also not the only factor. even if u.s. goods are cheaper by a factor of 3, there still won't be much importing. your objection was that the different effect of inequality on u.s. vs asian consumers, and i said it's because chinese consumers are too poor to bother with debt financed consumption while u.s. consumers are rich enough (or at least their credit reports once said they could).
according to orthodox trade theory, eventually china will be rich enough to buy u.s. goods too. but that has not happened for the vast majority of the population. (although the rich in china face very high import tariff, on 'luxury' products which includes ordinary u.s. capital intensive products) this effect is stronger in less unequal countries with a stronger middle class, such as taiwan/japan.
Certainly if their purchasing power was greater they could buy more stuff, but that's not the point. The point is that if they saved less they could buy more and if China encouraged domestic consumption over exports they would buy a greater proportion of goods from abroad.
isn't the point that they're trying to save up for 80 yrs to buy dat house?
Is that a fact or just something he said?
That's just what he said, I don't know jack shit about it. But I don't get the impression that the vast majority of Chinese are going to start constituting an export market for US goods any time in the near future... I know there's a lot of nouveau-riche types who want to buy gucci bags and stuff, and the tarriffs are really high, but that's not the majority of the population. Anyway, those people just come here to Seattle and buy that consumer crap for 1/3 going price in China anyway, it pretty much pays for the plane ticket
Well my point is actually really close to oneofthem's point. It's true that I don't think that the US citizen doesn't necessarily need more purchasing power : it's their purchasing power that basically prevented the economy from falling since the last thirty years (since the energy crisis and the price rise in 73). But they were able to do that because the finance sector made it possible, not because they earned it with an increase in their revenue, which pose a problem of solvability. And in China, Saudi Arabia or most of the other countries with high commercial balance (even germany in some regards) the inequalities are really at the core of their neo mercantilism (in fact it's an idea that was already defined in the washington consensus, where economists thought that the way to restore the commercial balance and the debt ratio of developping countries in need was to weaken the national demand through cuts in social spendings).
Asian countries are actually trying to build a finance sector and push people to trust their banks and ask for credit since ten years or so (the asian crisis of 1997 was caused by the weak finance sector of asian countries according to some economists - not for some others, like Stiglitz or Krugman). The problem is not only economic, it's also cultural. It's not really that they need to save half of their income to buy themselves house, but that they have no confidence for the future, and no confidence in banks, that they need a high precaution saving rates (no retirement system, no help for unemployed, no health security, etc.). Don't forget that in economy, it's really hard to explain how the saving rate evolves - for exemple the influence of the interest rate or the influence of the inflation on saving rates are indefinite. Even if economist don't like to say it, a lot of people explain saving rates through social and structural factors (if I'm not clear enough tell me).
Also the consumption function is ALWAYS true, Keynes rock it yo.
on the price of houses in china and wage levels, 80 years is probably overshooting the median but not by much. it's more like 50 years, and that's with a loan.
the huge number of application for shit paying government positions in china is also partially reflective of this. because the government still provides state employees of a certain level of seniority with housing arrangements. land rent sucks up a large part of housing prices, and this in turn a large part of consumer income for the average guy.
but yea it would be a serious mistake to attribute savings rate as some kind of choice or policy problem for china's government. it's just that poor people have to save to afford houses (loans still require substantial down payments that require many years of savings), while rich people opt to buy houses too, in america, australia and canada.
EPT
